Securities Lending Was a Problem at AIG

Additionally, AIG maintained a large securities lending program operated by its insurance subsidiaries.

  • The securities lending program allowed insurance companies, primarily the life insurance companies, to lend securities in return for cash collateral that was invested in residential mortgage-backed securities (RMBS).

⇒  This program was another major source of AIG's liquidity problems in 2008.  (p8)

2009 09 - GAO - Troubled Asset Relief Program: Status of Government Assistance Provided to AIG - 101p

AIG’s failure was absolutely just as much a product of its securities lending operations at its—as its default operations.

  • It would not have failed were it not for the fact that it had lent out the assets of its insurance companies to other entities, taken that money and invested it in mortgage-backed securities.  (p20)

--   Daniel Schwarcz

2017 1024 - GOV: House - The Federal Government’s Role in the Insurance Industry - [PDF-140p, VIDEO-youtube]

AIG's problems, however, were not isolated to its credit default swap business.

  • Significant losses in AIG's State-regulated life insurance companies also contributed to the company's collapse.
  • Approximately a dozen of AIG's life insurance subsidiaries operated a securities lending program whereby they loaned out securities for short periods in exchange for cash collateral.

Typically, an insurance company or bank will lend securities and reinvest the cash collateral in very safe short-term instruments.

  • AIG's insurance companies, however, invested their collateral in riskier long-term mortgage-backed securities.
  • And although they were highly rated at the time, approximately half of them were backed by subprime and Alternate-A mortgage loans.

Because AIG was unable to cover its obligations to both its securities lending and derivatives operations, it ultimately had to seek Federal assistance.

  • In total, AIG's life insurance companies suffered approximately $21 billion in losses related to securities lending in 2008.
  • Significant losses in AIG’s State-regulated life insurance companies also contributed to the company’s collapse.  (p4)
  • More than $17 billion in Federal assistance has been used to recapitalize the State-regulated insurance companies to ensure that they are able to pay their policy holders' claims.  (p5)

-- Statement of Senator Richard C. Shelby

2009 0305 - GOV (Senate) - American International Group: Examining What Went Wrong, Government Intervention, And Implications for Future Regulation, Government Intervention and Regulation of AIG (CSPAN) - [PDF-72p, CSPAN, VIDEO-CSPAN]

  • (ii) “I told him I had been doing some planning and doing some stress testing of AIG’s portfolios, and one of the conclusions I came to is if there were a liquidity crisis, particularly in the securities lending program, that that would require a lot of liquidity in a short period of time, potentially, and I thought that the New York Fed would be able to provide some support in that area.” (Willumstad: Trial Tr. 6343:13-24).  <Willumstad, Geithner> (p107)

Starr International Company, Inc. v. The United States - Case 1:11-cv-00779-TCW 

  • Document 428 - PLAINTIFFS’ PROPOSED FINDINGS OF FACT - 573p  -